housing recovery - All posts tagged housing recovery

The “housing recovery” is now such a staple of conventional wisdom among investors that it has gone mostly unquestioned. But Home Depot (HD) CEO Frank Blake sounded skeptical about housing in an interview with Reuters on Thursday.

“It’s starting to recover, but we’re a long way away from true recovery,” Blake said in the interview. “This housing market’s been very, very bad and it’s going to take some time to recover.”

“The way we look at it is there’s going to be a period of a workout, a fine period of one to two years and then you’re going to get a more robust recovery,” Blake added.

A Home Depot executive would clearly have real insight into the issue. We’ve talked to fund managers who see the home supply companies as the best way to play a rebound in housing. And the company has performed remarkably well since the housing bust, with the stock rising 78% in the past five years, versus 6% growth for Lowe’s (LOW).

Investors may be getting more skeptical about the “recovery” theme, or perhaps they think that some stocks have simply gotten ahead of themselves. Homebuilders got hit hard in the past week, and JPMorgan Chase’s (JPM) earnings beat, fueled by stronger mortgage-related income, isn’t wowing investors today.

Perhaps someone noticed that new home construction in August was still 49% below its average monthly level over the past 30 years, as the New York Times pointed out this week (of course, the Times pointed that out in an article entitled “Ways to Play a Recovery in Housing.”

Indeed, the housing fever appears to be in full swing. Realogy Holdings (RLGY), a chain of brokerages, held a stunningly stromng IPO this week.

Home prices rose for the fourth straight month in July, according to the S&P/Case-Shiller index released today. It was just one more piece of evidence that the housing sector is on the rebound. But investors don’t seem to need the reminder — they’ve been bidding up homebuilder stocks for months in anticipation.

In fact, some stocks in the sector may be getting ahead of themselves, writes Barclays analyst Stephen Kim.

“It appears that we have reached that point in the rally when investors are pricing in a ‘best case’ scenario — and even then it is difficult to justify much higher valuations for the strongest homebuilders,” Kim writes.

Kim thinks that concerns about excess inventory in recent years will give way to “a surprising shortage of quality housing supply,” which should push prices higher.

“Despite robust demand, supply constraints will likely keep housing starts from growing more than 25% per year through 2015. Meanwhile, inventories of non-distressed homes for sale are at their lowest level since 1992,” Kim predicts. “This scarcity of quality homes to buy could drive prices up 5.0%-7.5% per year through 2015, causing nominal prices in 2015 to exceed levels reached during the housing bubble.”

But isn’t that good for homebuilders? Yes, says Kim. In fact, he raised his price targets on stocks in the sector.

And yet, the gains from this scenario are already priced into the stocks. Investors have piled into homebuillders in part because there aren’t very many other ways to play the housing rebound using traditional investments. “[A]n absence of large-cap ways to invest in the housing theme has driven valuations in the sector to uncomfortable levels.”

Kim lowered his rating on DR Horton (DHI), Lennar (LEN), and Toll Brothers (TOL) to Equal Weight from Overweight. Instead he recommends “swapping into the higher-beta names KB Home (KBH) and Pulte Group (PHM).”

“The housing market has stabilized and the recovery is well underway,” said CEO Stuart Miller in a statement. “Low mortgage rates, affordable home prices, increased buyer confidence and an extremely favorable rent-to-own comparison are driving growth in each of our markets. Additionally, reduced foreclosures and declining distressed home inventory are further contributing to the improvement in the housing market.”

And yet, Lennar is down 1.7% after starting the morning in the black along with some of its peers. The builder and its peers may be getting hit by some of the same Europe-related fears as the rest of the market. Their charts are similar to the S&P 500 this morning. Toll Brothers (TOL) is off 1% and KB Home (KBH) is down 3%.

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The blog is written by Ben Levisohn, a former stock trader who has covered financial markets for the Wall Street Journal, Bloomberg and BusinessWeek.